VC industry at risk as politicians square off against Silicon Valley

In my last post, I outlined the reasons why the tech industry—from mega-cap, publicly traded giants like Facebook and Apple to the Silicon Valley-focused VC industry—should be on notice. In its hugeness and hubris, it is vulnerable to a populist backlash and regulatory crackdown.

The commoners have been held at bay because the benefits have outweighed the costs and been deflationary (versus the traditional fears that big business secures monopolistic powers and thus raises prices). Cheap stuff from Amazon. Free entertainment on YouTube. The feeling of self-importance from social media.

But the darker side has emerged. The sad children picking over the remains of Toys R Us, bludgeoned to death by ecommerce competitors (with the help of PE overindebtedness). Personal medical and financial data scattered into the ether of the dark web. Gaudy architecture choices, questionable decor and horrible working conditions.

And with Bank of America Merrill Lynch’s Michael Hartnett warning the industry is “cash-rich, tax-light,” it feels like a blowback is coming. As politicians and regulators begin to take action, many irons are already in the fire, so to speak, as shown by this sampling from Hartnett, which cites data and estimates from BofAML analysts:

• A new EU privacy law effective May 25 has a noncompliance penalty of 4% of global revenue; the global revenue impact on firms like Facebook and Google could be 2% to 3%
• A new EU digital advertising tax that could cost tech companies $6.2 billion per year, per estimates
• 425,000 jobs are at risk after President Donald Trump repealed internet lawsuit exemptions (related to the Communications Decency Act of 1996) making certain tech companies liable for content posted by their users
• The South Dakota v. Wayfair case before the Supreme Court would let states collect online sales tax for third-party merchant listings hosted on ecommerce sites like Amazon
• New antitrust and patent laws—perhaps including retroactive penalties for mergers that fail updated standards—are in the works, such as the “Better Deal” Senate bills and former White House advisor Steve Bannon’s calls to regulate large tech companies as public utilities
• Tougher antitrust enforcement, like Google’s $2.7 billion fine from the EU
• The recent Uber ban by London’s mayor and the UK opposition party’s threat to ban Airbnb
• New internet consumer privacy protections (the “Browser Act” in the House)
• New regulations on political ad disclosures (the Warner-Klobuchar-McCain Senate bill)
• A Senate bill by from Sen. Maria Cantwell (D-WA) to form a new Commerce Department Committee to grapple with the impact of AI and automation on workers
• South Korea has introduced the world’s first “robot tax” to reduce automation incentives
• Trump’s immigration crackdown, including the H-1B skilled worker visas popular in the tech industry, could raise labor costs

The VC industry needs to pay attention, because of the outsized influence ecommerce, software and computer hardware companies have on it. Deals involving these companies have comprised, on average, 44% of annual US VC activity since 2009, and they’re responsible for 47% of year-to-date activity, according to PitchBook data. US VC deal value in these areas is significant as well, having exploded from less than $9 billion in 2009 to a peak of $38.5 billion in 2016 before cooling slightly last year.

Venture capital isn’t the only industry affected. Per PitchBook data, the group has also averaged 13% of US M&A activity (second behind commercial services) and 11% of US PE activity (third behind commercial services and commercial products). But M&A and PE activity in ecommerce, software and computer hardware companies is heating up as a share of overall activity, with PE deals in these spaces collectively representing nearly 18% of the total, up from a low of 8% in 2010, while M&A activity has risen to nearly 17%, up from a low of 11.7% in 2015.

Should the early rumblings of a regulatory shakeup manifest into something real and biting, it’ll have a major impact on private markets activity as yet another technology bubble bursts. This time, at the hands of politicians acting on the will of an angered electorate.